Daio Paper President Masayoshi Sako on Friday told the press that the company would lodge a criminal complaint against its former chairman, Mototaka Ikawa

TOKYO (Nikkei)–The management of Daio Paper Corp. (3880) is in an awkward position. Members of the company’s founding family are embroiled in a scandal, but the family’s ties to the group are so deep and strong that executives can distance themselves only so far.

On Friday, Daio Paper released a report by a special investigative committee on questionable loans of more than 10 billion yen received by former Chairman Mototaka Ikawa from group companies. The company expressed its intention to file a criminal complaint against Ikawa.

At a press conference the same day, President Masayoshi Sako said, “Though (management) has respect for the Ikawa family, we have to do the right thing.”

The company also decided to dismiss Takao Ikawa, a former president and father of Mototaka, as an adviser, and Tahakiro Ikawa, Mototaka’s younger brother, as a board director, because, “They did not take proper steps early” despite being aware of the huge loans to Mototaka since spring,” Sako said.

The scandal has brought to light that the publicly traded company has in fact been controlled by a family, and its money has been used by a family member as arbitrarily as if it were a family owned business.

Some may think the incident will offer the company a chance to remove itself from the family’s control, but that is unlikely to happen given how heavily Daio Paper depends on the family, or more specifically, on Takao Ikawa, the group’s leader.

De facto CEO

The biggest-ever scandal to hit the Ehime Prefecture-based company has impacted its marketing activity, but few of its business partners have scaled back or suspended business with Daio Paper for any of its mainline printing and office- and home-use paper products.

After the scandal surfaced, “we tried to exploit our rival’s misstep to grab a larger share of the market, but we were unable to do so,” said an official at a major producer of home-use paper products. Explaining why the scandal-hit company has been able to remain so strong, an executive at a general trading house said, “We’re able to maintain confidence in Daio Paper as long as Takao Ikawa holds sway as its leader.”

Takao, the eldest son of Daio’s founder, Isekichi Ikawa, knows adversity. He experienced the bankruptcy crisis that hit Daio Paper in 1962, the same year he graduated from Keio University, when the firm filed for corporate rehabilitation under court protection.

Takao persuaded his father, who had wanted to focus only on newspaper printing paper and corrugated paperboard, to diversify to other paper products, such as home-use paper, and also to expand overseas. Takao managed to develop the firm into the third-largest player in the paper and pulp industry, after Oji Paper Co. (3861) and Nippon Paper Group Inc. (3893).

Takao served as president from 1987 to 1995, since which time he has effectively remained the top executive. Even after his son, Mototaka, was installed as president, “Takao made decisions on every important matter that affects the fundamentals of the company,” a source close to the matter said.

The lineup of top executives at group companies also indicates that Daio Paper has the distinct nature of a family-owned business led by Takao and other family members.

Daio Paper’s leading shareholder, at 7.4%, is Daio Shoko. Based in Ehime Prefecture, it appears to be a typical asset management firm, listing insurance and real estate as its main businesses. Its president? Takao Ikawa.

Takao’s younger brothers serve as the presidents of Tokyo Pulp & Paper Co. and another paper sales firm in Ehime Prefecture. And Takahiro, Mototaka’s younger brother, is a board director at Elleair-Foods Corp., a restaurant chain operator based in the same prefecture, which leases real estate from Daio Paper.

This arrangement means Daio Paper has established a mechanism through which every deal between Daio Paper and its group firms puts money in the pockets of the Ikawa family.

Loyal clerk

Even Sako, Daio Paper’s president, is regarded as a loyal “banto” (head clerk) for the Ikawa family in the papermaking business community. This loyalty was on display when he met the press to discuss the scandal. At that time, Sako said even though the company is firing family members and moving forward with a criminal complaint, “we have no intention whatsoever of parting with the Ikawa family.”

Takao’s prestige may be the very glue that is holding Daio Paper together. If his family pulled away from the company en masse, the group could collapse.

It seems that both the Ikawa family and Daio Paper’s management want to settle the problem by simply attributing it to the misconduct of Mototaka. From the viewpoint of corporate governance for a publicly traded firm, however, the matter cannot be dismissed as merely a personal scandal.

If the family actually begins to be expelled from Daio Paper, and the current management team also comes under increased pressure to step down to take responsibility for the incident, the company might find it difficult to remain a going concern.

It is also possible that many of Daio Paper’s clients will stop doing business with the company depending on the outcome of the public investigation.

Should such developments come to pass, the group of lenders, led by Bank of Tokyo-Mitsubishi UFJ, to which Daio Paper currently owes 280 billion yen in short- and long-term loans, might be prompted to place the company under its control and even dissolve it.